Good day, ladies and gentlemen and welcome to the Southwest Gas 2009 year end conference call. My name is Jeff, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Ken Kenny, Vice President and Treasurer. Please proceed, Mr. Kenny.

Ken Kenny

Thank you, Jeff. Welcome to Southwest Gas Corporation’s 2009 earnings conference call. As Jeff mentioned, my name is Ken Kenny, and I am the Vice President, Treasurer. Our conference call is being broadcast live over the Internet. For those of you who would like to access the webcast, please visit our Web site at www.swgas.com and click on the “Conference Call” link.

Today, we have Mr. Jeffrey W Shaw, Southwest’s Chief Executive Officer, Mr. John P Hester, Southwest’s Senior Vice President, Regulatory Affairs and Energy Resources and other members of senior management to provide a brief overview of 2009 earnings and an outlook for 2010.

Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2010. Rather, the Company will address those factors that may impact this coming year’s earnings.

Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management’s assumptions, which may or may not come true, and you should refer to the language in the press release and also our SEC filings for a description of those factors that may cause actual results to differ from the forward-looking statements.

All forward-looking statements are made as of today and we assume no obligation to update any such statement.

With that said, I’d like to turn the time over to Jeff.

Jeff Shaw

Thank you, Ken. Thank you for joining us today on this call. And we’re pleased with the operating results we have to announce or have announced to the market. It’s a marked improvement over the prior year. I believe we continue to demonstrate resilience in a very challenging economic environment, by remaining focused on our core fundamentals of our business.

Many say that but I think I’m going to be able to demonstrate in the comments that I give today that in fact that has really helped us to make progress by focusing on the core fundamentals. The detailed numbers are in our documents and I would point you to those. I won’t spend a lot of time on any of those detailed numbers, but I will discuss a number of noteworthy factors that point to our success.

On an annual consolidated basic EPS basis, we achieved $1.95 in 2009, as opposed to $1.40 in 2008. The increase in earnings was principally attributable to higher operating income from the natural gas segment and a positive swing in contribution for other income. What you have seen in our documents referred to as Company-Owned Life Insurance or COLI. I will refer to that as COLI going forward.

Our operating margin in 2009 grew by $13 million or 2%. The net result of several factors. Margin from our customer growth contributed $1 million and rate relief from all regulatory jurisdictions in 2009 accounted for $30 million. This was somewhat offset by warmer than normal weather.

The difference between years was $7 million to the negative in 2009 as opposed to 2008. In 2009, we estimate that the negative impact of weather principally in the Arizona jurisdiction was about $18 million versus $11 million in 2008.

Conservation due to energy efficiency and the impacts of the current challenging economy in our service area has resulted in about an $11 million decline to operating margin.

And if you take a look at our operating margin as we analyze our earnings, while I won’t give a point estimate on a normalized basis, I can point to two significant factors that we look at. We believe COLI kind of bring a lot of noise to our operating results.

If you looked over 2006 and '07, we had an average amount in there that we would see some growth. And then if you take a look at the volatility in the Company life insurance and its impact to earnings, we estimated it was about $0.15 negative you would take away from our earnings in 2009 due to the increase in the valuation of the assets embedded in the policies that we have for that Company-owned life insurance. Again, that’s a 15% takeaway, whereas in 2008 you would have to add back $0.32 we estimate.

Then if you take a look at weather, again, the $18 million versus the $11 million, in 2009 you would add back as a result of weather net of tax about $0.25 and in 2008, you would add back about $0.16. Now, there are a number of other factors, not to the magnitude of the two that I just referenced that would impact earnings.

The reason for this exercise we go through for analytic purposes is just to sort of indicate what has been the historical trend of our earnings as a result of our focusing on the core fundamentals of our business. And we can definitely see, based upon that exercise, by adding back and taking away in those two years, just those two big components, we can see a positive trend that has developed in the last two years. It speaks to the fact that we focused on those core fundamentals.

Now, as a result of our efforts to work with our regulatory commissions to improve and bring stability to our revenues and cash flows we realized rate relief in 2009 in every jurisdiction that we serve.

What I’d like to do is for a few moments turn the time over to John Hester, our Senior Vice President of Regulatory Affairs and Gas Resources, and he will address by state and our jurisdictions what has occurred from a regulatory standpoint and then I will have some other matters to discuss. John?

John Hester

Thanks, Jeff. I’ll start with Arizona. In December of 2008, the Arizona Corporation Commission issued a decision in Southwest general rate case which authorized a $33.5 million increase in margin rates. As part of that application, Southwest sought implementation of a decouple rate design.

While the Commission did not grant Southwest’s request on the rate design changes, the Commission has continued to review decoupling issues as part of a separate docket which is examining rate and regulatory incentives for the state’s gas and electric utilities.

Southwest is actively participated in that docket, along with other utilities, the Commission staff, the Residential Utility Consumer Office, and Energy Efficiency advocates. The proceeding is focused on establishing utility energy efficiency standards and feature as much as discussion on decoupling.

A draft regulation for the electric utilities was issued in October by staff, and was reviewed, modified and voted upon by the Commission in December of last year. Southwest is now waiting staff issuance of a draft regulation for gas utilities and expect that various state administrative reviews of the gas and electric utility rules will be completed later this year.

Separately, having now experienced the rates established in our last rate case for just over a year, Southwest will be reviewing the potential timing of our next Arizona rate case over the next several months. Historically, Southwest has filed a rate case application in Arizona about once every three years. Once we complete the first quarter of this year we will review our results of operations and be better positioned to evaluate the timing of our next application then.

There may also be some interplay between the timing of our next rate case application and the outcome of the rate and regulatory incentive docket I referenced. And so far as any opportunity to institute a decouple rate design outside of a rate case for that separate docket, may potentially delay the timing of submitting our next rate case application. Again, we will await issuance of staff’s draft gas utility regulation and the Commission’s vote on that regulation for further direction.

Moving on to Nevada, in October of 2009, the Public Utilities Commission of Nevada approved an annual revenue increase of $17.6 million in Southern Nevada and a $500,000 decrease in Northern Nevada. On a combined basis, after considering various O&M adjustments, the rate relief is designed to increase operating income for Southwest by $19.1 million annually.

The rate relief that was authorized as part of the Commission’s decision provided an operating margin increase of $2 million in 2009. Also noteworthy, the Commission’s decision authorized Southwest to implement a decoupled rate structure which will help stabilize margin by insulating Southwest from the effects of lower usage associated with conservation or unusually warm weather.

And Nevada decoupled rate structure also positions the Company to more aggressively pursue conservation and energy efficiency programs on behalf of our Nevada customers.

Southwest has a suite of conservation and energy efficiency programs that the Nevada Commission has approved with budgets that increase annually over the next three years.

Then, finally, turning to California, effective January 2009, Southwest received general rate relief for its California service territories from the California Public Utilities Commission.

CPUC authorized an overall increase of $2.8 million for the 2009 base test period, with an additional $400,000 in margin, which was deferred to 2010. In addition to the base year margin increase, attrition year increases were approved to be effective for the years 2010 through 2013.

Attrition year increases help the Company recover generally increasing costs of service in between our rate case applications. A first attrition request was submitted in October of 2009 and was approved effective January this year. The amount of the attrition increase was approximately $2.7 million. Our next general rate case in California will be for a 2014 test year and is scheduled to be submitted to the CPUC in December of 2012.

In closing, on the regulatory update, I would also note that management’s adherence to the Company’s key business strategies of controlling costs and exceeding customer expectations has really helped support our regulatory efforts as our state commissioners are very attendant to both of these issues as part of the regulatory review process.

With that I’ll turn it back to Jeff.

Jeff Shaw

Thank you, John. What I’d like to do now is spend a little time on two of the items John referenced. In particular, our cost control efforts and how we are trying to achieve customer satisfaction.

Two items I think are, again, to reemphasize what he has just said, in order to be successful and productive working with our regulators in the various jurisdictions we serve, we must show, we believe, the progress in the areas that we have control over. And I think we can do that and I’m going to talk about that now.

First of all, with respect to our operating expenses, they were held to a modest 2% increase over 2008 during 2009. Depreciation expense increased by $513,000 only, less than $0.5% and average gas plant in service increased about $193 million or 5%. Depreciation expense was impacted by lower authorized depreciation rates in both California and Nevada through the most recent regulatory decisions.

California had a $3 million annualized reduction effective January 2009. Nevada had a $2.3 million annualized reduction effective June of 2009.

Operation and maintenance expenses, if you look over the last four years, we had between 2005 and 2006, a 2% increase, during the next year period, a 3.2% increase, the next year period, a 2.2% increase and last year, year-over-year, our O&M was 3% higher over the prior year.

Now, our cost control efforts, the things that we have done, the investments in technology and operational innovations have allowed us to hold these increases to a rate of below that of inflation. And that’s been important. In fact, it’s been recognized even on the record in our regulatory filings that we’ve made. So that’s important and it’s been recognized and it’s helped us to recover those costs.

Our operational improvements in innovation result in a number of our full time employees declining over the last several years. In fact, if you look from the year 2005, we had 2,590 employees. At the end of 2009, we had 2,423 employees, a reduction of 167 employees during that time period or 6.4%. We were only able to do that as a result of sensible and wise investments in technology and some of the changes that we have made operationally.

Our customer to employee ratio improved from 743:1 at the end of December ‘08 to 753:1 at the end of December 2009, comparably one of the better such ratios in our industry. And as a result of hard work from our employees and their willingness to try something new and do things differently, we were able to achieve a customer rate even with that, notwithstanding those changes, we were able to achieve customer satisfaction last year of 96%.

Again, we believe one of the highest such ratings in the industry. If you take a look at that historic trend, it would be our expectations over time that we would be able to do something similar. So we’re focused on trying to do that.

Customer growth and the effects of slowdown the next thing I would like to talk about. During 2009, we had 18,000 first time meter sets. But we realized only 5,000 net additional active meters. Similar, as we reported in the last year, the communities we serve continue to experience high numbers of foreclosures.

However, in comparison to the two previous years, the difference between first time meter sets and active meters appears to be narrowing, which we think is at least an encouraging sign. As a consequence of the significant declines in home values throughout our service areas, the sale of unoccupied homes has been increasing. So we’ll see how that all plays out.

While we are seeing some new home construction in our service areas, the Company’s projecting net growth in 2009 to remain sluggish at somewhere 1% or less.

Now, we believe that as vacant homes are purchased and inhabited, the Company will begin to realize the positive effects of the incremental margin on operating results. However, we cannot predict the timing of the turnaround and it is likely that it will occur over time, maybe multiple years, likely lagging the national recovery. It appears that to be the case presently.

Next, I’d like to talk a little bit about construction expenditures, debt maturities, financing, liquidity and our capital structure, areas that I think are very encouraging when you see these metrics.

Firstly, our construction expenditures were $312 million in 2007, $279 million in 2008 and $212 million in 2009, a definite decline in the level of those expenditures. 2010 construction expenditures are expected to be approximately $200 million.

Construction expenditures are estimated to be about $570 million for the three-year period ending December 31st, 2012, down from a similar three-year projection in last year’s forecast of $720 million.

Operating cash flows, we expect over those three years should be sufficient to fund construction expenditures. So that’s a positive sign given the current circumstances.

With respect to debt maturities, in February 2009, the Company notified holders that the $100 million, 7.7% subordinated debentures or otherwise called preferred securities, will be redeemed on March 29, 2010. The Company will facilitate this redemption using existing cash and borrowings under its current $300 million credit facility.

And $200 million of debentures will mature in February of 2011 and $200 million of debentures will mature in May of 2012. So let me talk about some of what we expect going forward.

The Company expect to issue $8 million to $10 million from its various common stock programs over the next three years, but the Company expects no new projected net debt financings in the three-year period ended December2012. A real positive signal.

The Company intends to issue 250 million of new debentures in December 2010 and $200 million of new debentures in March 2012 to refinance those maturing facilities. To provide funding for those maturing redeemed obligations, the Company, in January 2010, entered into a forward starting interest rate swap lock transactions, two of them, to partially hedge the interest rate risk associated with its refinancing. About half of the amount needs to be refinanced.

Now, with respect to liquidity, we have a $300 million credit facility that expires in May of 2012. We’ve split it into two pieces, at least the way we look at it and the way we disclose it. $150 million of the facility has been designated long-term in nature and the remaining $150 million as a working capital portion of the facility.

At December 2009, at the end of the month, $92.4 million of long-term portion of the bank facility was outstanding. And we believe that the facility is adequate and that we have a solid liquidity position.

Our capital structure continued to improve, common equity in that capital structure improved from 36.2% in 2005 to 46.5% in 2009. That’s a solid improvement during that time period. And as a result of our improved financial metrics, Standard and Poor’s upgraded the Company from a BBB minus to a BBB flat stable outlook in April of last year.

The Company again will continue to pursue improvement in its credit ratings and we believe the metrics as we talked about today have improved such that we see that as a real distinct possibility on a going forward basis.

Like to mention just a few things about NPL, our pipeline construction subsidiary. They posted 2009 earnings per share of $0.18, an improvement over the $0.16 per share earned in 2008. And net income increased $836,000 in 2009 as compared to 2008. Notwithstanding the fact that revenues decreased $74.4 million between periods. This is primarily due to less construction work and the reduced amount of profitable bid work.

With minimal new construction in the nation’s economy, we believe NPL will continue to focus on infrastructure and maintenance improvement work. And NPL’s revenues and operating profits are influenced by weather, customer requirements, mix of work, local economic conditions, bidding results and the equipment resale market.

We anticipate that if you take a look historically, at the performance of NPL with the exception of the real robust years in '04, '05, '06 timeframe, a more normal contribution will be something you’ve seen recently and in the years prior to that on a going forward basis.

The Board, I want to speak just for a minute about dividends. Board regularly reviews dividend policy. You may recall that for a long period of time, more than a decade, we have not addressed dividend policy. It was at $0.82 a share. We now for the fourth year in a row have addressed dividend policy and increased it. In February 2010, of this year, the Board considered dividend policy and increased it from $0.95 per share on an annualized basis to $1 per share.

It was improved we believe based on the discussion of the Board, based on the Company’s stable operating cash flows, the improved capital structure and our stronger liquidity position. The Board will continue to monitor earnings cash flows and capital structure with an eye toward the possibility of further enhancing dividend payouts in the future.

We believe we have room to further address dividend policy. So it will depend on how we’re able to continue to pursue our strategy on the core fundamentals and improve the Company so that we can continue to address that dividend.

Now, with respect to closing remarks, I’d like to just recap 2010 as we go forward.

First of all, because of the rate case in Nevada and the attrition amount we’re going to gain in California, we expect margin improvement in 2010. The weather risk now is limited to Arizona, but again, we continue to pursue a combination energy efficiency standard with a decoupling mechanism to support that in Arizona. And I would characterize the discussion thus far as productive.

Our customer growth we believe will remain sluggish. Our operating costs with respect to the historical trend is where we are managing to. Our financing costs should improve, given the refinancings we’re going to undertake.

We will mitigate some of the interest rate risk that we see with respect to on a going forward basis due to the forward starting swaps that we entered into. Our capital expenditures are expected to be covered with internally generated cash flow and the dividend situation, we believe looks favorable going forward.

So we will continue to build on our successes. What we would like to do again is just reiterate our strategy, to work closely with our regulators, to have productive discussions, to improve and stabilize revenues and cash flows. And to do that, we will continue to pursue sensible cost control, we will aggressively manage our investment in growth and we will strive to exceed our customer expectations.

(Operator instructions). Okay, looks like there are no questions in the queue.

Ken Kenny

With no questions then, that concludes our earnings conference call today and we want to thank everyone for listening. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation. You may now disconnect. Have a wonderful day.

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